The Prevention of Money Laundering Act, 2002 (PMLA) is concerned with proceeds of crime that arise from any criminal activity relatable to a predicate offence, and the ultimate confiscation of those proceeds of crime. Under PMLA, the Directorate of Enforcement (ED) focusses on identifying and tracing proceeds of crime’ rather than investigating the predicate offence itself. The predicate offence is investigated by the predicate agency, for example the relevant police agency. The ED’s wide powers under PMLA, including powers to summon any person, conduct search and seizure, freeze bank accounts, attach assets, arrest without a warrant, have been the subject matter of much controversy. Recently, in the case of Vijay Madanlal Chowdhary & Ors vs. Union of India & Ors (Vijay Madanlal Case), the Supreme Court has upheld the constitutionality of these powers, on the basis that adequate safeguards exist in PMLA, and that the powers have a reasonable nexus with the objective and purpose of PMLA. While the Supreme Court verdict is facing wide criticism for not addressing abuse of the powers and processes under PMLA, a close read shows that there are few areas where the Supreme Court has in-fact read down or harmoniously constructed certain powers. Here the focus will be on those aspects of the Vijay Madanlal Case.

When can PMLA be invoked

To invoke PMLA, first, a ‘predicate/scheduled offence’ must be alleged. This condition can be satisfied by the mere registration of an FIR with a predicate agency. Second, there must be reason to believe that some property, i.e., proceeds of crime, has been derived or obtained from a criminal activity relating to the alleged predicate offence. People have been trying to read in a third condition as well – that, in addition to the activity of concealment, use, acquisition or possession, the proceeds of crime ought to be projected or claimed as untainted property. In the Vijay Madanlal Case, the Supreme Court has categorically rejected this argument and clarified that any of the activities, i.e., concealment, possession, acquisition, use of proceeds of crime or projecting or claiming proceeds of crime to be untainted, will supply the basis to invoke PMLA.

All that is needed is an alleged predicate offence and any proceeds of crime from such predicate offence. The list of predicate offences based on which PMLA can be invoked goes way beyond crimes like narcotics and terrorism. As an example the list includes cheating, forgery and several other offences under the Indian Penal Code, 1860 (IPC), bribery under the Prevention of Corruption Act, 1988 (POCA), insider trading and certain other offences under the Securities & Exchange Board of India Act, 1992 (SEBI), certain offences under the Customs Act, 1962, Copyright Act, 1957, Trade Marks Act, 1999, Information Technology Act, 2000, Environment Protection Act, 1986, Water (Prevention and Control of Pollution) Act, 1974, Air (Prevention and Control of Pollution) Act, 1981 and also ‘fraud’ under the Companies Act, 2013. Suffice it say the list is long and crimes covered do not necessarily bear any nexus with the goals of the law. This leaves companies and its officers vulnerable to potential PMLA exposure. Even though current statistics suggest that several investigations under PMLA are against politicians and connected people, there are now enough examples of investigations launched against companies and their officers and that trend is on the increase.

Broad Overview of Legal Proceedings under PMLA

In addition to arrest proceedings, there are two distinct legal proceedings that can emanate from PMLA: (a) proceedings for attachment of crime properties before the Adjudicating Authority (AA); and (b) the prosecution and trial of the alleged offence of money laundering before the designated PMLA Court. Attachment proceedings are decided by the Adjudicating Authority (based on a complaint known as ‘original complaint’ filed by the ED), from where an appeal will lie with the Appellate Tribunal set up under PMLA. On the other hand, the offence of money laundering must be tried by the designated PMLA Court based on a prosecution complaint filed by the ED with such designated PMLA Court. In summary, if the authorized officer has reason to believe (such reason to be recorded in writing) based on material with her that any person is in possession of any proceeds of crime and the same is likely to be concealed or dealt with in a way that will frustrate confiscation proceedings under PMLA, she can issue a provisional attachment order (PAO) to attach such properties following the process stipulated in section 5 of PMLA. The PAO is valid for 180 days. Within 30 days from issuance of the PAO, the authorised officer must file the original complaint (OC) with the ‘Adjudicating Authority’ (AA) seeking confirmation of the PAO. The AA will ask the aggrieved party to declare sources of income/assets used for acquiring the attached properties and to show cause why those properties should not be treated as properties involved in money laundering. After hearing the parties, the AA may either set aside the attachment or confirm it. The general trend so far suggests that the AA confirms most PAOs. The AA will try and complete this process within the 180 days to prevent the PAO from lapsing. Once confirmed, the attachment will continue during the period that the ED conducts its investigations, but for a maximum of 365 days. However, if the prosecution complaint is filed with the PMLA Court before expiry of the 365 days, the attachment will continue till the PMLA Court passes its judgement on the alleged offence of money laundering. Although there is no prescribed time limit within which the ED must file the prosecution complaint with the PMLA Court, to keep the attachment alive, the ED is likely to file it before expiry of the 365 days mentioned above. If the PMLA Court convicts the accused for the offence of money laundering, confiscation of the attached properties will follow.

Important Takeaways from the Supreme Court Verdict

Whether offence of Money Laundering is a standalone offence: So far the ED interpreted the explanation added to section 44(1)(d) of PMLA as allowing it to continue proceedings under PMLA even when the predicate offence itself is closed or quashed. The Supreme Court ruling in the Vijay Madanlal Case now makes clear that if the accused person is finally absolved by a court of competent jurisdiction due to a discharge, acquittal or quashing of the criminal case, there can be no action for money laundering against such person. This is a very important development as earlier the ED’s view was supported by the High Court of Bombay in the case of Babulal Verma vs. ED, where the High Court held that even if the agency investigating the predicate offence has filed closure report in it and the court of competent jurisdiction has accepted it, it will not wipe out or cease to continue the investigations under PMLA. Pertinently, after the Supreme Court’s ruling in the Vijay Madanlal Case, a PMLA court granted interim bail to Babulal Verma since the predicate offence relied upon by the ED has been closed by the local police, and while granting the bail also observed that a court cannot continue the PMLA case in the absence of a case relating to the scheduled offence.

Proceeds of Crime: At the heart of PMLA is the concept of ‘proceeds of crime’. The Supreme Court has categorically held that since proceeds of crime is the core ingredient making up an offence of money laundering, that expression needs to be construed strictly. The Supreme Court has held that only property, which is derived or obtained directly or indirectly, because of criminal activity relating to a scheduled offence, can be regarded as proceeds of crime. ‘Indirectly’ has been explained to include property derived or obtained from sale proceeds or in exchange of the property which had been directly derived or obtained because of the relevant criminal activity. The Vijay Madanlal Case makes clear that the authorities under PMLA cannot invoke PMLA on an assumption that the property recovered by them must be proceeds of crime. It has ruled that existence of proceeds of crime is quintessential and in the absence of proceeds of crime, the authorities under PMLA cannot step in or initiate any prosecution. This clear interpretation provided by the Supreme Court imposes some onus on the ED to satisfy itself of existence of proceeds of crime based on a nexus with the alleged predicate offence, which the ED has not necessarily been doing so far.

Possession of attached properties: According to section 8(4) of PMLA once a PAO is confirmed, the authorized officer “shall forthwith take the possession of the property attached…”. This provision read with the relevant rules mandated the ED to take physical possession of properties attached, soon after the PAO was confirmed. The Supreme Court has rejected the respondents’ arguments and read down the mandate under section 8(4) of PMLA by holding that directions under Section 8(4) for taking possession of the attached property before a formal order of confiscation, merely because the PAO is confirmed should be an exception and not the rule. Although this will have to be considered on a case-to case basis, the Supreme Court has provided some guidance by ruling that the principle set out in Section 5(4) of PMLA (which states that a person interested in enjoyment of immovable property attached will not be prevented from enjoying the same) should equally apply even after confirmation of the PAO. It is based on such harmonious construction that the Supreme Court upheld validity of Section 8(4) of PMLA. With this, the ED will not be able to mechanically issue a notice for possession of attached properties merely because of confirmation of the PAO. Interestingly, on August 23, 2022, in a case under the Benami law, (Union of India vs Ganpathi Dealcom Private Limited) while referring to the Vijay Madanlal Case, the Supreme Court has suggested that allowing such preliminary confiscation, even by exception, still leaves scope for arbitrary application.

The controversy regarding constitutionality of the EDs powers remains alive with the review petition that has been recently filed before the Apex Court. However, even pending such review, the interpretation in the areas discussed above should guide future actions of the ED and provide aggrieved parties with good basis for seeking remedy, including where the ED initiates steps without showing a nexus between the alleged scheduled offence and the alleged proceeds of crime or takes steps under PMLA when the scheduled offence itself is closed.